Exchange Rate Shocks with the Brexit Referendum and Portuguese Exports

Understanding the effect of exchange rate movements on international trade is a major issue for economists and for policy-makers. Using a quasi-natural experimental evidence on the effects of exchange rate shocks on export prices, quantities and export participation, the paper examines the consequences of the large, sudden and unanticipated plunge in the British pound following the Brexit referendum. As figure 1 shows, the pound depreciated sharply against the Euro after the referendum and it has stayed more or less at that level since.

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The UK is Portugal’s fourth largest market (and largest outside the Euro area). Using transaction-level monthly observations on export quantity and price, the paper identifies the response to the shock in the UK market relative to that in other countries, within a firm and product. The main result suggests that Portuguese exporters reduced their export prices to the UK market in euros by just 1% following the 10% depreciation of sterling. This implies that prices in sterling increased by 9% on average, a strong degree of exchange-rate pass-through. The paper identifies differences in the responses across firms, with large exporters absorbing somewhat more of the exchange rate change into their mark-ups than smaller ones.

Exporters of consumer goods reduced their price (in euros) by about 2 percent as a result of the shock whereas intermediate goods did not fall in price. Also, the referendum shock contributed to deter export entry to the UK market and to reduce the probability of continuing to export in the UK.

These results and the fact they pertain to a significant trading relationship suggest that exchange rate pass-through into the local prices of traded goods can be high, even in the short term.

Click here to go to the paper by Ana Fernandes and L. Alan Winters

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